SINGAPORE (Jan 17): In the second half of last year, investors sought refuge in safe haven assets as macroeconomic uncertainties and market turmoil continued.
But gold prices defied gain expectations, rising to some 18.3% over the course of the year to cross more than US$1,500 ($2,020) per ounce. It is set to be shinier this year, with some expecting the prices to be higher than the 2011 peak of US$1,920.
Banking giant JP Morgan had expected gold prices to average around US$1,325 while Bank of America had predicted it to rise an average of US$1,296. In a November report, Swiss private bank Lombard Odier noted that given the current investment environment, gold had become a “necessity rather than an optional allocation”.
This year, the good streak is likely to continue as New York-based bank Goldman Sachs has kept its three, six and 12-month forecasts for gold at US$1,600 per ounce on the back of geopolitical uncertainty and precautionary investor behaviour.
“Household savings in major developed economies are growing strongly which, combined with a slump in global capex, resulted in a global savings glut. That should boost the demand for defensive assets such as gold,” said the bank in a note published on Dec 6.
A safe haven asset
Besides the safe haven attributes, the low-yield environment has also added to the attractiveness.
“We think that sluggish growth, low inflation, and low yields will extend in 2020, making a case for precious metals such as gold and silver,” states KGI Securities in its 2020 outlook report.
For SPI Asset Management’s head of trading and market strategy Stephen Innes, gold prices are all about interest rates but the weak manufacturing data in the US economy could well trigger another rate cut from the Federal Reserve. “This would add rocket fuel to gold prices,” Innes tells The Edge Singapore. “Gold in its purest bullish pursuit is all about interest rates. If the Fed cuts rates, gold will soar.” Innes adds that central banks have been buying gold, thus supporting prices. However, he believes this is “nothing sinister” but a diversification strategy. “It’s just prudent reserve management as many central banks expect the USD to weaken this year, and they want to own other currencies, and gold in the even that view comes to fruition,” he adds.
However, Lombard Odier’s Asia-Pacific Chief Investment Officer Jean-Louis Nakamura acknowledges that gold prices might also see a slight correction sometime during the year before returning to 2019 levels.
“After a relatively brief period of increased volatility, risky assets prices would resume with the melt-up dynamic observed before the US initial strike, gold price might be subject to a short-term correction due to its overbought conditions, and long-term rates could come back to their levels observed at the very end of 2019,” he explains.
A good year ahead
According to ING head of commodities strategy Warren Patterson, the gold prices are never easy to forecast accurately. After all, this is a precious commodity pegged to unpredictable geopolitical events. While he admits that the recent easing in tensions on both the trade front and in the Middle East could ease gold prices, “there is always a risk that these could reignite once again fairly quickly, increasing the demand for safe haven assets.”
“Saying this though, I think gains in gold moving ahead will be much more limited than what we have seen over the past year,” says Patterson, adding that in addition to progress on the trade front, there is also reason to expect limited easing from the Fed with only one rate cut for the year.
Investment analyst at Phillip Futures Benjamin Lu, however, identifies a potential stumbling block for bullion appeal amid an upcoming US-China trade deal which could mark the end of an 18-month long trade war between the world’s two largest economies.
“Gold prices have illustrated for marked volatility as market expectations shift over headline trading activities. Though we remain dim on bullion prospects [in] 2020 over signs of bottoming in global economic conditions, looming market uncertainties will prevent a rapid slide in price levels for 1Q,” says Lu, who adds that gold remains a key asset to own in this climate.
Looking ahead, DBS remains optimistic on gold prices for the year. Although a less volatile environment with trade optimism and talks could continue to challenge gold prices in the 1QFY2020, it believes that there is strong support for the metal with an upside bias.
“We believe gold is not as speculative as before, as it now has more longterm holders, including central banks and pension funds. Gold is also used as a currency hedge, in both ways, for both US dollar, and non-US dollar holders, as it has outperformed most currencies in the past years,” says DBS chief investment officer Hou Wey Fook.
SPI Asset Management’s Innes suggests that investors hold 10% of their portfolio in gold. “Granted, not all signals are aligned as risk continues to froth but the outlook for gold remains constructive. The uncertainty around the macro environment and escalated geopolitical risk continue to favour keeping a core long in gold,” he says.